Times always seem fortuitous for those companies in information and communications technology (ICT) that focus on the newest and fastest growing demand. This is even truer when other outlooks in the economy are, to say it nicely, as subdued as is the case today. So it come as no surprise that the handful of Lebanese companies which specialize in the emerging business of developing applications for mobile devices are buzzing with aspirations.
By the reckoning of the members in this new Lebanese branch of the global ICT industry, the field of developers in Lebanon today comprises about five companies that are focused exclusively on mobile app consulting and development. Approaching the market with innovative names such as FOO Solutions, Eurisko Mobility and Apps2U the larger of these companies employ between 15 and 25 professionals apiece and have on average produced 20 to 30 mobile apps in the past three years or less.
A second group of Lebanon-based companies with supply-side mobile app business interests include developers that produce apps as a value-added service to their existing ICT business or are expanding from their existing business into the apps space. A third group of companies are startups and young companies that are product centric, meaning they are in the business of developing games or financial payment solutions and use the mobile as one of their channels to engage customers. These companies, however, do not seek to address third party demand from companies that are looking to have apps developed by specialist services firms.
For FOO founding partner and CEO Elie Nasr, a crucial value gain since the company’s formation in early 2009 was the acquisition of skills. “Part of the process [is] where clients invest and the company benefits from delivering the project but also from the learning involved in producing the app,” he said.
Eurisko’s co-founder and CEO Zack Morad told Executive that the company has become a regionally known entity in less than 18 months of operations. “We started marketing our services in late 2010 with all cold calling,” he said. “In the first six weeks of 2012, there was almost no cold calling. Now, a lot of people call us.”
The growth rates for the relatively small, in terms of employment numbers, have been impressive. FOO and Eurisko expanded from founding teams of two and four entrepreneurs in 2009 /10 to teams each numbering just under 20 professionals at the end of 2011. For 2012, each of the two competitors looks to reach team sizes of 30. Like the other mobile app developers in Lebanon, FOO and Eurisko have been financed from own funding resources of the founding entrepreneurs and their business partners, not by small and medium enterprise investment funds, venture capital groups, or private equity firms. Morad and Nasr also both said that they are entering a phase where their respective companies are looking for injections of capital. The company has grown organically until now and is bent on reinvesting its earnings, Morad said, “We are not taking anything out of the business. We will always be investing and growing because we see the big picture and we want to grow and help grow the market.”
Similarly to Eurisko and FOO, the headcount at Apps2U is advancing toward 20 specialists. What is different in the genesis of Apps2U is that this enterprise grew out of the business of parent company MT2. This firm, although having worked for many years with relatively low profile, is well established in regional ICT. Its corporate DNA is rooted in telecommunications and MT2 acts as a content and services provider in partnership with network operators and audiovisual media across Arab markets. “We are a telecom company and we are offering all kind of mobile app services to all kind of customers in the region, not only in Lebanon. MT2 has connections with over 30 operators,” Apps2U managing partner Mario Hachem told Executive. The content formulas of MT2 include highly profitable features such as subscription-based delivery of Islamic content – e.g. guides to the proper observances during Ramadan and hajj – via SMS to mobile phone users across regional markets from Saudi Arabia to Iraq under revenue sharing agreements with network operators.
This business sparked the formation and growth of Apps2U, said Hachem, who is also chief technical officer at MT2. “For the last three years, operators have been asking for apps and for the last three years our team has been increasing in numbers and experience,” he said.
Scheduled to be turned into a standalone company under ownership by the current MT2 investors, Apps2U plans to increase team size from 16 developers to between 25 and 30 before the year’s end. The growth is in part for adding new technical expertise, as the firm wants to build skills in developing apps on the Microsoft 8, Facebook, and SmartTV platforms. As it has been expanding into the mobile app sector, the latest addition to the interactive portfolio of MT2 and Apps2U in February 2012 was a dedicated television channel on Nilesat where Blackberry users in the Middle East can flash their chat messages on the TV screen while communicating within the Blackberry community as well as with users of different smartphones.
Also sporting a strong business profile in providing value-added services to telecommunications operators is Inmobiles. Established in Beirut as startup in 2003, the firm has grown to a current team size of 80 by delivering products to telecoms operators or the banking sector, but until now never to end users, Inmobiles CEO Charbel Litany told Executive. The company made its first foray into the provision of an app to end users just at the end of 2011. It did so with a big splash, as the “whozcalling” app went viral in the space of weeks.
According to Litany, the roll out of the free app and its success nicely links to a strategy to convince network operators of a value proposition involving operator-owned app stores to push into the space currently controlled by device manufacturers. “I am trying to push value-added services on the device side and have network operators change from the network side to the device side. With the huge growth of the smartphone market, we have decided to test the market with one of the free products,” he said.
The company has so for not been monetizing its successful app in favor of using it as “proof of concept” in demonstrating to regional telecom operators that they can generate their own revenue with their app stores. This notwithstanding Inmobiles’ first free app appealed equally to regional and global users.
Corresponding to the limitations on assessing the value of enterprises on the supply side of mobile apps, searching into the demand side value for Lebanon’s mobile app developers does not provide a picture with clear and sharp contours.
According to Fadi Sabbagha, the chief executive of Born Interactive, local market potentials for mobile apps are limited by the small budgets that most Lebanese companies allocate to digital. For his firm, apps are not a standalone business but a natural extension of its communications services on a basis of client demand. What’s more, most of the business is in the region, not in Lebanon.
In all likelihood, the small budgets in Lebanon are directly correlated to the small size of the Lebanese market which translates into small revenue potentials, he told Executive, noting that hype over mobile apps here is paired with restrictions on budgets whereas in regional markets he observed, “a bit less hype but clients are more comfortable with budgets.“
While acknowledging that apps are still on the slow burner in the Lebanese market, Ralph Khattar, CEO of 2010 startup Virtual, added that the launch of every app developed for a major Lebanese company provides a boost to the business.
“Each time a company launches an app, they are promoting it, and each time is advertising [app development]. There are a lot of companies that need an app and we can have a good market share. Twenty percent is a good number,” he said.
Responses from the firms that have ordered apps give a clue that the experience is a bit more differentiated. Some high-profile companies which had apps developed for them in the past two years gave Executive overall positive and satisfied feedback but added that things could still get better.
According to Jihad Murr, the Chief Operating Officer of television station MTV, the station’s strongly advertised app is not yet highly used but among the most downloaded Arab applications on all platforms.
“For Lebanon, it is too early to make money from mobile apps but I think mobile apps and related revenue streams in the future will be a big part of the income for our media. We wanted to be the first in this market,” Murr said. MTV’s mobile app is linked to the station’s website, which has 70,000 unique visitors per day.
According to Eurisko Mobility, which developed the app for MTV, the station’s app has been downloaded over 300,000 times. The company embarked on the mobile app project with the intent to monetize it through revenues streams from paying advertisers, he added. The ad activity has been scheduled to start in March and MTV will also seek to obtain revenue from in-app sales of specific programs. Both projects are in progress but have advanced slower than planned. “We were late in monetizing it. We are starting now but I expected to start six months ago,” Murr said.
Similarly, business development director Michel Aji at restaurateur Roadster Diner enthused about the company’s mobile app in general but could convey no positive message about harvesting financial rewards from the year-old gadget.
The app was the number one among the free-to-download apps for the Lebanese market in the first two weeks of its launch in the first quarter of 2011 and had reached 15,000 downloads by mid February 2012, Aji said. The company serves in the range of 200,000 monthly visitors across its 12 eateries in Lebanon.
“On return on investment on this particular application, there is no reliable data,” he conceded, pointing to the Lebanese issue of unreliable data connectivity as a reason why the app does not facilitate online ordering.
No cheap feat
Costs of commissioning a mobile app are certainly an issue in the small local market. Companies that ask a Lebanese provider to custom develop a mobile app for them look at a cost of “at least $5,000”, Sabbagha said. This appears to be a consensus figure in the industry. The ceiling of possible cost for an app is not really defined, and Hachem said it can reach “$100,000 per platform”.
For entrepreneur Bahi Ghubril the cost of having a high-end app developed for several thousands of dollars per mobile platform is certainly a barrier. Ghubril is CEO of Zawarib, a mapping company with a declared mission to make Beirut easier to navigate. But although maps and mobiles make a natural fit and location-based services are among the reliable performers in application stores, the value proposition in Lebanon is not strong enough for his company to go it alone in commissioning an app.
“People consider apps to be a sign of success but users expect everything in apps and online to be free; at the same time it costs a lot of money to develop a strong app that would have good interactivity and a good search function for Zawarib while the market for this in Lebanon is very small,” he said, adding that the proposition of developing an app could be interesting in a partnership with online portals but not as a branding tool or mere image project.
Competitive edge or just edge?
The developers agree that infrastructure problems and high cost of connectivity are barriers to the industry’s growth in Lebanon. However, the better-late-than-never rollout of 3G services by the mobile phone operators Alfa and MTC Touch since last November has resulted in some 400,000 users who by February 2012 have taken to the services.
The outlook seems to be moderately positive also on the structural side of telecoms as latest annual management contracts between the government and the two network operators, which went into effect at the beginning of last month, contain two, albeit somewhat vague, management objectives of positive relevance to mobile applications developers: network operators are each to enable at least one Mobile Internet Service Provider by deadline of May 31 and to establish a mobile applications platform by 2013 “that hosts and offers mobile applications to subscribers”, with the added stipulation that four fifths of the applications have to be sourced from Lebanese developers. The two propulsion factors for competitiveness of Lebanese developers are the high quality of the human capital and its low cost in Lebanon. “Beirut has a highly-educated human resources pool, highly motivated, highly creative, and very cost efficient,” Morad said.
From Inmobiles, whose Charbel Litany said the company has seen zero attrition in its headcount since starting operations in 2003, to Virtual whose Ralph Khattar referred to the country’s leading universities as ready sources of talent, the developers describe Lebanon’s rich human capital as a core strengths that the industry can build on. This comes with the downside of losing staff to players abroad. As Nasr said, “the problem is not migration to competitors in Lebanon but people going overseas.” For FOO, a loss of four staff members who went abroad to join companies or pursue further education represented 70 percent of employee turnover since the company started.
As all mobile app developers in Beirut are aware of the threat of losing high-value talent to multinational firms, each company said that it is investing substantially in employee loyalty and retention, offering profit sharing or stock grants to its existential talents.
As every developer Executive talked to also has aspirations to grow its business internationally, foreign competition is an issue to consider. According to the Lebanese providers, India, the world’s leading country in ICT outsourcing, is not the biggest competition, because, as Nasr argued, Indian supply comes with a price-value caveat under which high-quality apps will be just as expensive as those produced here.
The GCC countries are also not on the radar as big competitors because of their low availability of native human resources and high costs of production in the knowledge economies. This leaves countries closer to Lebanon as main sources of competition in developing mobile apps under similar price and quality matrixes. One serious contender is Egypt, which was one of the rising stars in the outsourcing globe, before running into disruptions of economic reliability in 2011. Other countries with competitive potential vis-à-vis Lebanon are Jordan and, according to Nasr, Palestine.
Mobile applications developers represent the third wave of potential knowledge economy progress via ICT made in Lebanon. It serves to recall here that the first two waves — the introduction of mobile telephony in 1994/95 and the new economy take-off in 1999/2000 — also saw the country start out at the forefront of ICT adoption and native entrepreneurship. Both times, the natural competitive advantages of Lebanese innovativeness and richness in human capital were eroded, at least in part, by systemic, political inabilities to support the economic competitiveness of Lebanese ICT firms.
Business Models in Mobile apps
The business models underlying the development and delivery of mobile apps by serial app developers come in three main categories:
First — the free to download, which is still the largest group. When such an app is ordered by a client, the app developer produces a customized product according to demand specifications that include interactive features and the number of operating systems and platforms that the app needs to run on. These apps can function as enterprise tools within a company (for example as catalogues for the sales team), as marketing, branding, and customer relations tools toward a company’s end customers, or as instruments enhancing the company’s corporate social responsibility portfolio. As the developer produces the “free” app for a corporate client, he is paid like any other software consulting and developing company. In many cases, developers also produce free apps at their own cost and push them into the markets to build reputation or to generate advertising or sponsorship revenue streams.
Second — user paid and individually priced apps which can be downloaded for a onetime fee. This bazaar or mall-like business model has been pioneered by Apple’s App Store and benefits both the developer, who in case of the App Store reaps 70 percent of revenue, and the platform, which takes the rest. This model has proven to work well for popular apps as users pay fees that in many cases amount to less than one dollar for each download. If an app goes viral through peer-to-peer recommendations by users or effective marketing schemes, the monthly revenue streams can scale into very handsome sums and high profit margins. Apps in the ultra-long tail of available products, however, until now are not likely to generate enough income to recover development costs. The owners of leading platforms and application stores — currently the device makers (with Apple on top) and Google — are beneficiaries of concentration in consumer capital, but network operators and other players are not going to leave this attractive market place un-staked in the rising mobile technology economy, or mobitech.
Third — apps that rely on recurrent revenue streams from users. Under this model, a basic app is often offered for download at no cost. However, the free download acts as teaser. To succeed, the app needs to convey attractiveness and inspire loyal and habitual usage. Customers are either asked to pay for the continuous use of the app after the initial free usage period, or are offered premium services for which they pay either time-based, recurrent subscription fees or per-item charges. This in-app purchase model unlocks income streams for content providers and network operators.